Friday’s rally was a welcomed relief for U.S. equities and a better than fair day for U.S. bonds after a tough week for both stocks and bonds. The November Employment Report released early Friday confirmed that the U.S. economy is still recovering with 211,000 new jobs created in November. With the employment coming in above expectations, a Fed rate hike later this month is all but certain. What the Fed does after the initial lift off from zero is anyone’s guess, but be prepared for a ¼% raise in the overnight rates later this month. The smart money has already factored this pricing in so the adjustment in the marketplace should be muted when the Fed actually announces the rate hike.

A rough sell-off mid-week is a good reminder that with rates still at historical lows, locking in your loan is a very prudent practice in the current market. However, with bonds trading well today, we are biased toward cautiously floating interest rates into next week.

Our thoughts are with the city of Paris.

U.S. mortgage rates remained range-bound with the 10-year U.S. Treasury trading down to 2.24% Friday morning from 2.30% earlier in the week. Friday was “a no-activity day” with respect to economic reporting.

However, the Federal Open Market Committee released its minutes this week which eased the stock markets. The consensus is that even if the Fed raises interest rates, they will do so very gingerly. Further placing a ceiling on U.S. interest rates was dovish commentary out of the European Central Bank (ECB). More stimulus could be coming to help boost inflation.

At the moment, we are carefully biased toward floating interest rates given the recent rise in rates in the U.S., as well as considering the economic and geopolitical events surrounding the globe.

U.S. bonds are trading better Friday morning after several bond-friendly economic reports and an ongoing decline in the world stock markets this past week. Heavy on traders’ minds is the decline in oil and other commodities which is a deflationary signal. Each and every week we attempt to make sense of the markets, but the data is so mixed, it remains quite challenging.   

From a short-term rate increase standpoint, many feel that the Federal Reserve will raise short-term interest rates in December, even though there is still no sign of inflation (as evidenced by this morning’s Producer Price Index (PPI) report) simply because the Fed indicated it would do so in its last meeting. This is creating even further confusion as inflation and wage growth are non-existent, the Fed’s dual mandates behind raising interest rates continues to be argued by both dissenters and supporters. Some are saying that the low interest rates are causing deflation and that by raising rates, inflation would follow. We will leave that argument to the experts. 

Therefore, based on today’s deflationary reports, we are biased toward floating interest rates very carefully into next week’s widely followed Consumer Price Index (CPI) report.

U.S. bonds are having a tough end to a bad week. With chatter growing throughout the week about a December rate hike, the spectacular October jobs report has made a December rate hike feel like almost a done deal. The October payrolls grew by 271,000, well more than expectations of 185,000. The unemployment rate fell one-tenth to 5%, and the closely watched employment participation rate (U6) fell to 9.8%.

U.S. Treasuries are getting clobbered Friday morning with the 10-year treasury yielding 2.30%, and the 2-year treasury spiking to .91%, a level not seen since May 2010.

With adjustable rate mortgages (ARM) still very attractive and fixed rate mortgages still near 4%, we are strongly biased toward locking in interest rates.

U.S. bonds had a tough week with the 10-year U.S. treasury trading up to 2.18% after the Federal Open Market Committee (FOMC) comments on Wednesday.

Commentary from FOMC did not rule out a rate hike this December. In its policy statement, the FOMC reiterated its dual mandate of full employment and 2% percent inflation as a continued theme in the decision to raise short term interest rates. The comments suggested that continued modest increases in employment could tip the Fed to raise rates. No one knows for sure, but trading suggested a stronger bias toward a December 2015 rate hike after the FOMC comments were released.

While U.S. policy makers continue to discuss rate hikes the rest of the world continues to ponder how to use monetary tools to stimulate their economies. How this will play out is anyone’s guess.

With so many diverging policy making decisions being presented on a global scale, we are watching the market closely and are very cautiously floating interest rates at this time.

U.S. bonds sold off this week in response to another positive week in the world stock markets. The U.S. stock market experienced an excellent week of trading as global central banks (minus the United States) are all utilizing quantitative easing policy tools in response to their slowing economies and deflationary fears. Both China and Europe are lowering interest rates. China surprised the market Friday morning with an interest rate cut. This has pushed money out of the safe haven status of U.S. bonds into riskier assets such as equities and has increased bond yields.

While a Fed funds increase is off the table for October and maybe for the rest of the year, it will be interesting to see how U.S. bonds trade as other countries pump their economies with new “QE” while the U.S. moves away from these stimulus policies. As written previously, the world economic issues remain highly complex and deciding where rates will trend is a tough call.

However, with U.S. bonds still trading a tad over 2%, we are biased toward locking in interest rates at these levels.

This week was light on economic reports. While last week’s job report was a boon to bonds and provided a lot of commentary on whether the Fed would raise short term interest rates, this week’s release of the Fed’s minutes, which were dovish in nature, sent stocks on a bit of a run at the expense of bonds. The Fed minutes verified policy makers concerns about a global economic slow-down, as well as their indecision about raising short term interest rates. Where we go from here is anyone’s guess, but a 2015 rise in short-term interest rates seems to be off the table for now.

Mortgage rates feel a bit stuck at the moment, but each week can bring new surprises. However, with mortgage bonds near various support levels, we are biased toward locking in rates.

With the spotlight this week still focused on the Federal Reserve, and whether or not the Fed will increase short term rates this year, all eyes were on the September Jobs Report.

The report was a disappointment with just 142,000 new jobs created. This number was well below the predicted expected job creations number of 205,000. Furthermore, July and August jobs were revised lower by a total of 59,000. The unemployment rate remained at 5.1%. However, the Labor Force Participation Rate, which measures the number of people in the labor pool, dropped to 62.40%, the lowest number since the early 1970’s. A bright spot in the September report was the U-6 number, which includes anyone who desires a full-time job, but cannot find one, which fell to 10%, the lowest reading since 2008.

Globally, central banks around the world continue to prime the pump to boost their economies. Foreign government officials have put a great deal of pressure on the Federal Reserve not to increase interest rates. This last jobs report may have convinced the Federal Reserve to keep short term rates at zero until 2016.

The Fed is in a tough spot: should they raise rates and hurt the global recovery, or, don’t raise rates and threaten to create another domestic bubble in riskier assets.

With the poor jobs number, and the 10 year trading under 2.00%, we are closely monitoring the bond market and are biased toward floating, albeit carefully.

It is all about the Federal Reserve (The Fed). Janet Yellen, The Fed Chairwoman, clarified some policy thinking on Thursday and intimated that the domestic economy is good, that employment is trending in the right direction, and that short term interest rates could very likely go up by the end of 2015. This hurt U.S. bonds through rising yields and energized the U.S. stock market which traded positively on the news out of the Fed.

There were several moderately impactful economic reports this week, namely, 2nd quarter Gross Domestic Product and Consumer Sentiment. Both reports came in better than expected. These positive reports have added additional pressure on rising bond yields.

Technically, mortgage bonds were unable to break through certain resistance bands this week which suggest yields could continue to move higher. We are biased toward locking in loans.